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Taxation of Offshore Funds

Many of the funds available within an offshore investment bond can be purchased outside of the tax advantaged bond wrapper. This section explains the taxation and reporting consequences of holding and disposing of offshore investment funds not held within a qualifying investment bond. The taxation of offshore funds which have not been sheltered with a tax advantage wrapper, such as an offshore bond, can be both immediate and inefficient.

HMRC applies two very different methods of taxation for offshore funds, such as OEICs, Exchange Traded Funds or SICAVs, depending on whether they are deemed to be “reporting” or “non reporting”.

Tax on the investor

Investment gains from reporting funds tend are taxed on the individual fund holder as chargeable gains and are taxed in a similar way to a UK unit trust so can be offset against the annual exempt amount and gains in excess of this amount would be liable to capital gains tax at 10% or 20%, depending on the income tax position of the investor.

Gains from non reporting funds, are taxed as income, sometimes referred to as ‘offshore income gains’ so the usual income tax rates of 20%, 40% or 45% apply. If there are no distributions, no tax is liable on the investor until the fund is sold.

Reporting funds do not have to make distributions to investors but if it is accrued to the fund, it becomes taxable at the “distribution date” and this would need to be disclosed by the investor to HMRC via a self-assessment form.

If a reporting fund does distribute income to an investor, this will be taxed as dividend income and the tax rate will depend on the investor’s highest marginal rate of income tax. This will be 7.5% for a basic rate taxpayer, 32.5% for a higher rate taxpayer and 38.1% for an additional rate taxpayer. This dividend income can be offset against available dividend allowance and savings allowance.

Some reporting funds which distribute income may be taxed as interest. This would apply to deposit based, government gilt or corporate bond funds containing more than 60% fixed interest securities.

Both of the above types of yield would need to be disclosed to HMRC by completing a self-assessment form.

Tax on the fund

Typically dividends from equities received by an offshore investment fund contains a tax credit, which can no longer be reclaimed by the fund manager. This is known as “withholding tax”.

Some funds will be liable to Stamp Duty Reserve Tax when they buy or dispose of shares. This tax is paid by the fund manager, not the investor.

Reporting funds are obliged to submit accounts to HMRC to ensure on-going compliance. For an up to date list of offshore funds which HMRC has granted reporting status, you can check here: https://www.gov.uk/government/publications/offshore-funds-list-of-reporting-funds